Vysoká škola ekonomická v Praze
Diplomová práce
2008 Jana Heřmánková
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Vysoká škola ekonomická v Praze Fakulta mezinárodních vztahů Hlavní specializace: Mezinárodní obchod
Název diplomové práce:
Organizing of Multinational Corporations in the Region of Central and Eastern Europe
Zpracovala: Jana Heřmánková
Vedoucí diplomové práce: prof. Ing. Dana Zadražilová, CSc.
3 Prohlášení
Prohlašuji, že diplomovou práci na téma
„ Organizing of Multinational Corporations in the Region of Central and Eastern Europe “ jsem vypracovala samostatně.
Použitou literaturu a podkladové materiály uvádím v přiloženém seznamu literatury.
V Praze dne 12. 3. 2008 ………
Podpis
4 Touto cestou bych chtěla poděkovat vedoucí diplomové práce prof. Ing. Daně Zadražilové, CSc. za cenné rady, připomínky a metodické vedení práce.
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Content
Content ... 5
1. Introduction ... 7
2. Multinational corporations: definition, evolutionary phases and footprint in national economies ... 9
2.1. MNCs: Definition and Business Entities ... 9
2.2. MNC: The Emergence and Evolution of Global Players ... 10
2.3. MNC: An institution positively contributing to national wealth or harming the local efforts ………..12
3. Designing of Multinational Corporation: Theories and Trends ... 15
3.1. The Roots of Organizational Designs in Multinational Companies ... 15
3.2. Organizational Design under the Influence of Industrialization ... 16
3.3. Organizational Design on the Threshold of Globalization... 17
3.3.1. From commanders to coordinators ... 23
3.3.2. The Global – Local Dilemma ... 24
3.4. The 21st Century Organization: New Trends, Designs and Approaches ... 26
3.4.1. Four organizational principles ... 28
3.4.2. AAA model ... 30
4. Central and Eastern Europe: Principal changes on the economic map of Europe .. 37
4.1. CEE: A Promising Region for Corporate Investments ... 38
5. Multinational corporations in the Central & Eastern Europe: A successful approach to markets sharing the communist heritage ... 41
5.1. Differences in fundamentals – the root causes standing behind the organizational failures41 5.1.1. A need to organize for a business growth of 30-200% p.a. ... 43
5.1.2. Manage for ultra subscale markets... 44
5.1.3. Operate on assumptions with little data available ... 45
5.1.4. Build around lacking infrastructure ... 45
5.1.5. Manage around the lack of talent ... 46
5.1.6. Large cultural distance ... 46
5.2. CEE pitfalls as perceived by Chief Executive Officers ... 47
5.2.1. Too many heterogeneous markets: Efficiency versus local adaptation ... 50
5.2.2. Lack of managerial talent ... 58
5.2.3. How to motivate people in CEE countries ... 62
5.2.4. Coping with high rates of growth ... 65
6. Case Study: InBev, the world beer market leader ... 68
6.1. Company’s introduction: Evolution and Internalization of a successful MNC ... 68
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6.2. Dynamic changes in Organizational structure ... 69
6.3. InBev AAA Triangle ... 70
6.4. CEE zone: InBev approach to regional challenges ... 71
6.4.1. Many small and heterogeneous markets ... 72
6.4.2. The importance of the CEE region related to the produced volume ... 75
6.4.3. Talent management, motivation and engagement ... 77
6.4.4. Managing the growth in the region ... 79
7. Conclusion ... 81
8. Bibliography ... 84
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1. Introduction
The multinational corporation is a phenomenon which can be traced back to the threshold of the 20th century. Currently, a century later, the multinational corporations are accountable for more than 70 % of the world international business total volume. Through their international subsidiaries, they are able to reduce the home market’s imperfections, comprehend economies of scale and scope; easily transfer knowledge and gains cross boarders and thus increase the corporate rate of profitability. However, the strengthening competition puts permanent pressure on companies’ performance and makes them focus not only on efficiency in core activities but also on perfections in organization which importance is still growing. Under these circumstances, the proper integration of the foreign subsidiaries (either acquired or set- up) into the main body of the corporation is vital for the following success in the particular area when going international and it challenges the company significantly in terms of organizational structure excellence.
In the early 1990’s, after the disintegration of the Soviet block and collapse of the communist regime, the multinational corporations started exploring on a large scale the opportunities in Central and Eastern Europe (CEE). Following the royal incentives of local governments, companies instantly entered (and are still entering) the region. Regarding the organization, companies penetrated with the similar organizational models (and related organizational practices) as they were in use in their home markets or in markets where a company was actively present. Nonetheless, this copy-paste approach is limited by many bottlenecks which occurred in the CEE region and a number of negative results were achieved. What makes the region different from the other regions, mainly from neighboring Western Europe where most of these companies were coming from? What are the major challenges in the region of Central and Eastern Europe in terms of organizing? How to address these challenges and what
8 are the hidden pitfalls? These are the difficult but tempting questions that rise up and which this study attempts to answer.
In order to achieve the target, this study set up these three objectives. Firstly, to arrange the theoretical overview by spotting and elaborating the most important characteristics of multinational corporations, the particulars of the CEE region and the historical and current trends in organizational design. Secondly, to assess the empirical survey identifying the most considerable organizational challenges in the region and thirdly, to examine the choice and implementation of a particular organizational structure by a multinational corporation under the theoretical framework and look at its approach to the CEE challenges. The third objective will be inspected on the case study concerning InBev, the world beer market leader which should prove or deny the theoretical hypothesis.
Since the multinational corporations embrace the key businesses in the CEE countries and keep extending their activities in the area, this paper will endeavour to identify the most suitable organizational approach for a present-day multinational corporation operating in the region of Central and Eastern Europe.
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2. Multinational corporations: definition, evolutionary phases and footprint in national economies
The large multinational corporations (MNCs) represent an integral part of today’s world.
They substantially contribute to the creation of the world economy and have a powerful influence in international relations. They dispose with extra-large financial resources available not only for financing of their core business activities but also for public relations and political lobbing. Considering the importance of Multinational Corporations in present- day economic society, it is essential to understand the insights concerning MNC structures, evolutionary phases and the overall impact on national economies.
2.1. MNCs: Definition and Business Entities
The definition1 says that a multinational corporation is such a company which has its business domicile in a one particular country and is actively present in at least two other states realizing there at least 10 % of its annual turnover.
This definition covers industrial and trade companies, businesses providing financial services, marketing and advertising agencies as well as consulting and engineering companies.
The parent company, which usually serves as the strategic and administrative centre, can set up a business entity in foreign country in the form of:
Subsidiary – an entity located in a host country, a part of the parent company which controls the majority of shares. The managing company appoints the CEO.
1Ghertman, M.: Le management stratégique de l'entreprise, Presses Universitaires de France, Paris, 1994. pg 6;
ISBN 80-86009-06-08 (Translation into Czech: Prochadzkova, E, 1996)
10 Associate Business - an entity located in a host country, a part of the multinational company which does not have the full control but participates in managing the entity holding 10 – 50 % of shares.
Branch – an entity fully owned by the parent company (bearing its full name and brand marks), often a form of a representative office
What form of a business set-up the MNC chooses, depends foremost on the strategic intention of the company and the economic, political and cultural conditions in the target market.
Setting up business in a foreign country and the right integration of the new business entities helps the MNCs realize the benefits related to the expansion. The firms may thus reduce the market imperfections through internalization and comprehend the economies of scale and scope, which allows them to increase efficiency. Setting up foreign subsidiaries can also foster the knowledge transfer and innovation which has a positive effect on the corporate long term performance and mirrors itself in the profitability. Nevertheless, some theorists (Barkema, 2000, Tallman 1996) emphasize the unequal relationship between international expansion and increases in profits. According to their empirical surveys, the constrains originate in the rates and patterns of expansion 2
2.2. MNC: The Emergence and Evolution of Global Players
The origin of multinational corporations can be traced back to the 19th century in the USA.
There were the most haymaking conditions for business (mass production, significant progress in transportation...) and therefore the USA is considered the cradle of multinational corporations. Nevertheless, some historians claim that the British East India Company (origin
2 Barkema, Harry. Building a Profitable Multinational Corporation. London Business School.2001
11 in 17th century) or the Dutch East India Company were in fact the first proper multinationals.
That is undoubtedly truth but they were rather exceptions of that time. The boom of MNCs broke forth two centuries later.
Doc. Vaclav Kaspar from the University of Economics, Prague identifies 5 basic phases in the MNCs development.
The first phase is dated back to the 19th and 20th century break when MNCs began exporting their capital abroad in order to produce and sell the goods overseas. This decade is determined by the exploitation of the wealth offered by the remote colonies – “colonial-row material companies”. In the second phase, the MNCs called “trusts” appeared between the First and Second World War. Firstly, they mainly focused on the army equipment, after the war they twisted the production to civil goods and some of them survive until today. In the post-war period, the key role worldwide was played by the companies coming from the USA which were almost untouched by the War. Furthermore, the Brettonwoods conference (1944) created very favourable conditions for American capital to be invested in the recovering Europe which even accelerated their growth.
The MNCs of the third decade (1960´s) were already able to utilize the results of scientific and technical research and exploit the advantage stemming from the cooperation in international production. The main idea was to fully utilize the company’s potential coming from their size and gain the economies of scale. Thus many companies significantly standardized their products and centralized some of the corporate functions as finance, product development or IT service.
At the beginning of 1980´s many corporations went global. Those companies represent the fourth decade in MNCs evolution. The competition got fierce and the whole world became one battlefield. The most advanced technology signified the winner.
12 The companies of the fourth phase are also characterized by having a powerful influence on the governments in both domestic and host countries.
In 1990´s most MNCs went through a specific transformation. The companies of the fifth phase make the effort to ingrate their foreign subsidiaries into the main corporate body in the way which would maximize the positive effect for the host economy. They transfer their valuable know-how and technologies to the end-country in order to make production which would take into account the local needs and adapt the output to the local environment.
2.3. MNC: An institution positively contributing to national wealth or harming the local efforts
Once a multinational corporation decides to enter a new market, it compiles a list of positive deliverables which are presented to local authorities in order to get as much incentives as possible.
According to International Monetary Fund (IMF), the positive effects on the host economy can be divided into two main groups – (a) direct benefits which are brought about by linkages between MNCs and local firms (e.g. suppliers and distributors) and (b) indirect benefits which are created by increased rivalry at local market or via generation of external benefits3. The latter ones basically mean that the innovation is transmitted internally within the firm from country to country. Thanks to a strong interaction with the external environment, the company’s innovation activities quickly spill over to the local market. This leads to the external benefits generation and endogenous location advantages. 4
The economic literature quotes five main positive effects which came about largely through:
transfer of technology and other intangible assets
3 International Monetary Fund report, 1995, http://www.imf.org/external/data.htm
4Marion Frenz. Multinationality Matters in Innovation, Industry and Innovations 2005, 12, 1: 1-28.
13 productivity increase improving the efficiency of resource utilization
rise in competitiveness of the acquired company (increase in management quality, higher employee engagement contributes to higher efficiency)
decrease in unemployment rate in the region financial contribution to state budget
Nonetheless, many of these benefits are at least disputable. The active presence of such a strong multinational entity winds up local companies usually by means of aggressive price policy. That primarily applies for economies in transition such as CEE countries. The decrease in unemployment rate is paid by the domestic tax payers in the “royal” incentives given to MNCs when entering the market. The profit repatriation can cause a serious problem to the current account of the balance of payment as a massive outflow of the generated cash.
Also the increase in management quality can be debatable. The expatriate managers might be masters in their domestic site but coming into the new environment gives them a very hard time. Moreover, the acquisition of a new entity requires a well prepared organizational integration. Otherwise the internal chaos can mess up the entire transaction and bring down the targeted company.
If we admit that despite the harmful effects, MNCs have a positive impact on the national economies; it still has to be kept in mind that they are only private entities whose main goal is a maximal profit. Moreover, the benefits from one economy does not mean positive effects worldwide. For instance, the AIDS crisis is one example that highlights the motives of some of the larger pharmaceutical corporations. When South Africa wanted to try producing more generic and cheaper drugs to help their own people, these companies actually lobbied at the US government to impose sanctions on them.5 Another example demonstrating the problem
5 International Monetary Fund report, 1995, http://www.imf.org/external/data.htm
14 could be the evasion of tax and other responsibilities. Through corporate crime, tax havens, transfer pricing and many other policies, both legal and illegal, billions of dollars are avoided from being taxed. The much needed money would help developing (and developed) countries provide important social programs for their populations. Usually, these worldwide crimes, which often have far worse effects than individual crimes, go unaccounted.6
Nonetheless, today corporations have major (positive or negative) influences on our lives. It should be bear in mind that out of the 100 largest economies in the world, 51 are corporations while only 49 are countries. MNCs employ millions of people worldwide and they are an indivisible part of our world, moving medicine, technologies and our lives continuously further.
6 www.globalissues.org
15
3. Designing of Multinational Corporation: Theories and Trends
Before trying to decide what organizational design fits the MNCs operating in CEE best, it is essential to elaborate the possibilities of the organizational layout being to managers at disposal. Even though the purpose of this chapter is not to map the historical development in organizational structures, the key tendencies shaping the structure in the past will be briefly mentioned in order to get the insights of the past studies in this field. The main attempt here is to pinpoint the current trends in organizational structure of MNCs.
3.1. The Roots of Organizational Designs in Multinational Companies
The organizational design, as well as MNC itself, has gone through its own history and development over the past centuries. Should the organizational structure help the corporation on the way to success, it always had to reflect the situation in the marketplace and meet the particular needs of business. Thanks to the changes in the company’s layout, today business theorists can better identify the phases of the world business transformation.
Many studies of organizational design go back to the “pre - industrial” economy of 17th century to spot the roots of organizational structure development. In that time most businesses consisted of small groups of people organized around a family unit. The direct supervision of the owner/manager/father was how the coordination of business activities was pursued.
People were dispersed over large areas and markets were limited to a local community and surroundings. Although nowadays the geographic distribution of people is completely different than it was in 17th century, the form of family businesses survived since that time as the simplest type of organizational structure.
16 Although these companies went through many transformations and were given entirely different forms and shapes, a lot of large international companies still bear the name of the founder’s family.
3.2. Organizational Design under the Influence of Industrialization
The main change brought about by industrialization is the shift from local to national markets.
This was a natural consequence of a number of technical inventions and social change as nation-wide railways demographical move into the towns and cities or introduction of post and telegraph systems. All these factors increased the need to coordinate business activities over longer distance and direct supervision was not possible any more. Functional design was the reaction to the new environment. People and jobs were clustered by functional departments; a clear chain of command was put in place. The job of managers is differentiated from production employees. 7
A creation of divisional8 designs was identified as a next step in organizational structure development. This change had been caused by two major factors. (1) Companies were moving their production to developing markets often in overseas countries (Ford, Du Pont, GE..) and (2) the range of products was significantly broadened. That constrained the coordination of capabilities within existing functional structures. The shift to divisional design represented the very first sign of organizational decentralization.
7 Zammuto, R.. F., Bedeian, A.. G.: Organizations : theory and design. Chicago : Dryden, c1991. pg 233
8Definition: division - a business entity focusing on a specific product (group of products); a part of the primary business not separated from that business, and the primary business is legally responsible for all of the
obligations and debts of the division. A division is different from a subsidiary, in that a subsidiary is a separate legal entity owned by the primary business – www.wikipedia.com (Overtaken from: Barnett, Richard, 1974:
Global Reach: The Power of the Multinational Corporations)
17 The complexity of technological problems and rapid technological changes brought about a next structural innovation which was a matrix design. The initial impulse came from the aerospace industry and in quick emerging military–industry joint ventures in 1950´s. The complexity of projects required more than just one manager and joint managerial forces were necessary for its accomplishment.
3.3. Organizational Design on the Threshold of Globalization
The time period starting in 1960s and lasting till end of the century is in the classical literature called the post – industrial age or the period of global economy. The United States dominated in most business areas, facing almost no competition. But it did not take a long time for the world business environment to rebound from the post-war period, new elements emerged and companies began to compete worldwide. A. Bedeian and R. Zammuto describes the birth of international competition as follows:
“As the economies of Western Europe and Japan were rebuilt and many lesser developed countries - such as South Korea, Taiwan, Brazil, Malaysia and Mexico - began industrializing, U.S. firms faced new competitors. At first this competition was in the foreign markets where U.S. multinationals operated. Then the scope of competition became international as foreign firms also began exporting. By the late 1980s, U.S. domination of the world’s economy had ended.”9
The end of American hegemony was caused by many factors arising worldwide. There were four most important features identified that have mainly contributed to the change of the international trade landscape since the 1960s:
Global industrialization – Industrialization became a global process, not just a European or American issue. It links countries in Latin America, Asia, Africa…etc.,
9 Bedeian, A., Zammuto, R. Organizations Theory and Design. Dryden. 1991. pg. 236
18 having a great impact on trade, environment, culture, technology, and lives around the world. In 1980 according to Business Week Global 100010, the top thousand of MNCs already included 48% of Asian companies, 34% of American and 17 % comprised European firms.
Rising Living standards – the increase in international trade provides people with higher disposable income causing a rise in the standard of living. Even though the growth is not balanced among continents, it raised the demand for goods and services worldwide and accelerated the changes in international trade.
Global transportation and telecommunications – The rapid development of global transportation and telecommunication systems is considered to be the major factor standing behind the globalization by means of enabling people to compare different lifestyles and business opportunities all around the world. The ease of global telecommunication and transportation significantly contributed to homogenization of consumer tastes and facilitated the expansion of MNCs to new emerging markets.
Rapid technological change – Technological and scientific innovations notably shorten the product life cycle and put pressure on companies to expand internationally and globally in order to prolong the cycle.
The changes leading to more complex business, going across geographical and cultural boundaries, apparently require more complex organizational structure. These innovations in international trade bring about new aspects on the ground - intercultural differences. Since then, the feature of culture has to be taken into account in any business activity and theory.
10 A ranking of the world´s 1000 largest companies according to the market value
19 The task of global organizational design is to incorporate the business units11 (BU) around the world as they were emerging within the geographical expansion and globalization. The critical point in the BU integration is not to harm the function of the original corporation and retain the fundamentals as defined in following statement:
“Every healthy and prosperous company should be organized in a way that shareholders love it, managers appreciate, and employees trust“ (Elliott Jaques, Canadian researcher in organizational design, 2001).
The more remote (geographically, culturally, socially) is the business unit the harder is its integration.
A. Bedeian (1991) and R. Zammuto (1991) came out with a very logical arrangement of organization in global economy. They distinguish 3 categories according to the strategic focus and distribution of the critical functions – International-trade design, Country-focused design and Global integrated design.
Organizations conducting their business internationally in 1970s and 1980s leaned foremost either to International-trade design or Country-focused design.
The International-trade design is suitable for export-based companies with strong dependence on the organization’s product lines. It can have both functional and divisional structure. The critical functions are pursued from the home country where marketing, production, research and development are located as well.
11Definition: Business Unit (BU) is understood as a unit within the overall corporate identity which is
distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to products and markets. When companies become really large, they are best thought of as being composed of a number of businesses (or BUs) – www.wikipedia.com,
20 Exhibit 1: International Trade Design (Functional)
Source: Bedeian A., Zammuto R. Organizations Theory and Design.Dryden. 1991
Exhibit 2: International Trade Design (Divisional)
Headquarters
|
| | |
Product 1 Product 2 International
R&D R&D Country 1 Sales
Production Production Country 2 Sales
Marketing Marketing Country 3 Sales
Source: Bedeian A., Zammuto R. Organizations Theory and Design. Dryden. 1991
The Country-focused design is characterized by decentralization of the overall activities into business units abroad which have a full control of the operations. The local presence in the end markets ensures better understanding of local conditions, tastes and preferences. The headquarters only shape the corporate strategy and subsequently review the financial performance.
Headquarters
|
| | | | |
R&D Production Marketing Finance International
Country 1 Sales
Country 2 Sales
Country 3 Sales
Country 4 Sales
21 Exhibit 3: Country-Focused Design Strategy
Headquarters
|
| | |
Country 1 Country 2 Country 3
| | |
R&D R&D R&D
| | |
Production Production Production
| | |
Marketing Marketing Marketing
Source: Bedeian A., Zammuto R. Organizations Theory and Design.Dryden. 1991
The International Trade Design is considered to be more efficient out of these three approaches. The firms traditionally focused on main or core activities which were coordinated from the centre. That enabled them to avoid functions duplication which is, on the contrary, typical for country-focused model. In that structure, the negative aspect of duplication along with non-existence of economies of scale is offset by the competitive advantage stemming from the deeper knowledge of local market and product adjustments to the needs of regional consumer.
It is obvious that companies balance on the edge whether to prefer globalization or localization of their production as a reflection to global market conditions. In other words, the key question is what to go for in efficiency versus local responsiveness trade-off.
The globally integrated design provides us partially with the answer.
22 Exhibit 4: Globally Integrated Design
Source: Bedeian A., Zammuto R. Organizations Theory and Design.Dryden. 1991
This strategy of global integration creates a closely linked and interdependent international network. That differentiates the “global structure” from the previous ones which missed the interdependency and were controlled by a one way stream of orders from the global headquarters. The network is created by dispersed entities connected together by a particular specialization which makes them dependant on each other. For instance, one unit can be responsible for asset management in financial institution while another can serve as a product factory. Or else, each entity can produce a part of a company’s overall product line which they then export to the other unit for next assembly, distribution or sale.
The following matrix sums up the characteristics of the described organizational lay-outs.
Country B Division
Country C Division
Country D Division Country E
Division Country A
Division
Country F Division
Global Headquarters
23 Exhibit 5: Comparison of International-Trade, Country-Focused, and Globally Integrated Designs
International Trade Designs
Globally Integrated
Designs Country-Focus Designs
Strategic focus
Standardized goods and services for export
Global goods and services adjusted for local
differences
Goods and services developed for specific local markets Strategy responsibilities Centralized at global
headquarters
Shared among global headquarters and divisions
Decentralized to the divisions
Subunit relations Hierarchical Interdependent Semiautonomous
Distribution of critical functions
Located in home-country Dispersed throughout the divisional network
Located in each division
When appropriate
Consumers purchase good because of distinctive characteristics; few or no modifications required for sale in different national markets
Demand for good with some modifications exists in several national markets; variations in local needs, distribution system ,etc., require an insider’s knowledge of the market for success
Little or no overlap in demand across national markets
Example: Toyota (1970s) Toyota 1980s/GM 1980s GM (1970s)
Source: Bedeian, A., Zammuto, R. Organizations Theory and Design. Dryden. 1991pg. 247
3.3.1. From commanders to coordinators
Regarding the administration, the role of top managers has been shifted significantly over the last decades as well. Their part in previous structures was described as commanders and strategy makers. Contrary to that, in the globally integrated design, top managers are primarily coordinators. They are responsible firstly for the coordination of the development of strategic objectives and operating policies, secondly for coordination of logistics between operating divisions and thirdly for coordination of the flow of information among divisions.12
The keen competition in global scale put a high pressure on efficiency and flexibility of business. All companies worldwide were challenged to respond to this trend and new models of managing and structuring the company were in need. The issue of organizational structures became more complex and more variables have to be taken into account.
12 Bedeian, A., Zammuto, R. Organizations Theory and Design. Dryden. 1991pg. 245
24 3.3.2. The Global – Local Dilemma
The MNCs attempt to optimize their structure and activities. Within the effort to find the best solution for behavior at foreign markets, companies have two basic approaches at disposal. A company has to decide if it adapts itself to local market or exploits the maximum in economies of scale via global standardization. The problem of efficiency versus local adaptation was attempted to be solved in many studies. The Perlmuttler´s EPRG theory is probably the most popular one even though it is more of a business approach than an organizational structure theory. In contrary to International-trade, Country-focus and Global integrated designs, the EPRG as a management tool embraces also the areas of management and marketing.
Exhibit 6: EPRG model related to Marketing Strategies
Management model/ organizational structure Marketing strategies
Ethnocentrism Domestic/regional
Polycentrism International
Regiocentrism Multinational
Geocentrism Global
Cybercentrism Universal
Source: Gordon, L.A. Cybercentrism: Teleology of Knowledge Management Dynamics. 13
Another approach was revealed by Mrs. Deresky’s analysis in her book International Management- Managing across borders and cultures, 2000. She considers the same two major aspects determining the organizational structure in the no-barriers environment – globalization and localization - but gives a twisted look at the problem described above. Her model portrays the alternative structural forms which are appropriate to each of the variables and suitable for the level and type of international involvement desired by the firm. The model proposes the transnational corporation as most developed form of business as shown in the exhibit 7. (The movement along the vertical axis in the chart means that a company develops itself
13 http://www.usdla.o rg/html/journal/OCT00_Issue/story02.htm
25 internationally via product standardization on a global level utilizing the economies of scale.
Moving along the horizontal axis means geographical expansion through sensitive adaptation to local market taking the advantage of the customer’s proximity and understanding.)
The theory says “that as the company becomes larger, more complex and more sophisticated in its approach to world markets (no matter the structural route – product/geographical/matrix structure), it may evolve into a transnational corporation (TNC)”14, whereas Multinational Corporation is only a lower stage in the company’s evolution. The MNCs consist of many different companies, subsidiaries, suppliers and individuals which result in relational networks. The parts of network often adapt different structures and the needs for their more tight coordination made the organization evolve into global company. “Organizing to facilitate a globalization strategy typically involves rationalization and the development of strategic alliances. To achieve rationalization, managers choose the manufacturing location for each product based on where the best combination of cost, quality and technology can be attained.
The rationalization also means that the product design and marketing programs are essentially the same for all end markets so as to achieve the economies of scale”15. In terms of effective management, this approach requires centralized global product responsibility. It establishes a position of a manager in the headquarters who is responsible for the product worldwide. The disadvantage and threat of this approach is the lack of differentiation and very often the insufficient specialization for local markets.
Through the form of MNC and global company, firms started seeking the advantages of horizontal organization in the detection of transnational capability and form the TNC network structure. “The TNCs should maximize the positive effects of both variables by using the
14 In more detail in: Deresky, Helen. International Management. Managing across borders and cultures. Prentice Hall. 2000. pg.299
15 In more detail in: Deresky, Helen. International Management. Managing across borders and cultures. Prentice Hall. 2000. pg.194
26 structure of networks, alliances and horizontal design formats.”16 Linking the model of Mrs.
Deresky with the AAA model17 of Mr. Ghemawat, it can be concluded that the TNC is such a company which is capable to utilize the benefits of all tree strategic dimensions – adaptation, aggregation and arbitrage. The management system and inter-company process are developed at the most advanced level and allow the most efficient deployment of global resources.
Exhibit 7: Organizational Alternatives and Development for Global Competition
Source: Deresky, Helen. International Management. Managing across borders and cultures. Prentice Hall. 2000
3.4. The 21
stCentury Organization: New Trends, Designs and Approaches
The new century has brought about new needs and concerns in organizing. Since the hard elements of organizational design were easy to copy and implement by competitors,
16 In more detail in: Deresky, Helen. International Management. Managing across borders and cultures. Prentice Hall. 2000. pg.301
17 Explained in detail on page 30 and further
Opportunities and Needs for Localization
Opportunities and Needs for Globalization
Domestic functional with international division
Geographic area structure Global product
structure
International Company
MNC
Global company
TNC
Matrix structure
Horizontal organization, alliances and networks
Transnational structure
27 companies recognized a need of taking the advantage from the soft elements and mirror them appropriately into the structure.
The previously mentioned strategies and theories show us that organizational designs tend to compromise between being local and global. The world market requirements made companies introduce strategy which is known as “glocal”, bearing the famous message of “be global, act local”. It is not easy to find the proper balance but it has been proven over decades that it is the only way to gain economies of scale, be sensitive to local preferences and hence generate enough profit for shareholders and the company itself. This approach was revolutionary in 1980s and became kind of necessity in 1990s, but the 21st century calls for new tactics to stay competitive in global scope.
Knowledge as a main source of competitive advantage recently became the most remarkable feature. The move from the “industrial age” society to the “society of knowledge” brings a need for adjustment also in the field of organization. Knowledge, as the most valuable asset, gets into the centre of corporation’s attention. Many companies go through restructuring in order to reflect this qualitative change in their corporate organizational structure. That should be built around the key “knowledge workers” to support their productivity.
It seems according to the last studies that nowadays the old vertical and matrix structures significantly impede the effectiveness. They have solved how best we can incorporate the increasing number of business units growing around the world but today the organizational overlays nearly always make the professional work more difficult, complex and inefficient.
The reasoning is that ”Professionals cooperate horizontally with one another throughout a company, however, vertical structures force such men and women to search across poorly connected organizational silos to find knowledge and collaborators for their purpose and to gain their cooperation once they have been found.”18 That stems from a fact that the main
18 Bryan, L,Joyce, C. The 21st-century organization. The McKinsey Quarterly.2005. No:3.
28 means of production is not the land, capital or labor, but the productive use of knowledge. In a recent survey concerning the best way of organizing, many MNCs replied that the problem is not to get the information or particular knowledge but it’s sharing to right people in the company19. The McKinsey study confirms that finding proper people and knowledge becomes more and more difficult. As a result, we can observe declining social cohesion and trust among professional colleagues which reduces the productivity further.
The McKinsey developed a new organizational model which fully mirrors the structural problems of current society. According to them, big corporations must change their structures dramatically to create the best suitable environment for professional workers in order to raise their productivity.
This innovative approach is based on two basic ideas:
The value is created almost solely through intangible assets as brands and networks Groups of professionals have to focus on clearly defined tasks with clear
accountability
The new overlaid networks and marketplaces that enable professionals to interact and collaborate easily are the results of company’s modern restructuring.
3.4.1. Four organizational principles
How to achieve the recognized quality in the organization structure? The theory suggests four interrelated organizational-design principles which should be put in place in order to reach the goal20:
1. Simplifying the line structure
19 One measure of the difficulty of sharing can be represented by the volume of global corporate e-mails. It has increased from 1.8 B per day in 1998 up to 17 B per day in 2004
20 Bryan, L., Joyce, C. The 21st-Century Organization: The McKinsey Quarterly.2005. No:3.
29 This principle suggests streamlining and clarifying of the structure. Too many reporting relations bewilder the organization and create uncertainty in accountability and responsibilities. To avoid this confusion it is advised to discard the complicated matrix and establish a dominant axis of management – product, geographical, functional or customer.
2. Using a dynamic management processes to resolve the short and long-term trade-offs.
The second principle focuses on division of responsibility among the managers according to the time perspective of their goals.
“Fundamental redesigning of a company’s technological platform calls for small groups of full-time focused professionals with the freedom “to wander in the woods”, discovering new, winning value by trial and error………Few down-the- line managers, who must live the day to day in an intensively competitive marketplace, have not the time or resources for such a discovery process”. (Lowell Bryan, McKinesy Quarterly, 2005)
3. Develop talent and knowledge pools for easier exchange of intangibles.
Exchanging knowledge on a company-wide basis in an effective way is a much less technological problem than an organizational one. The removal of structural barriers is inevitable. The question of motivation plays the key role. The carriers of knowledge must have good incentives encouraging them to share knowledge and codify them. The seekers need to have a convenient access to the content which should be richer and easier to get than external alternative resources.
4. Lower the level of supervisory control, measure the performance directly.
This principle suggests that as many people as possible shall be managed directly by themselves. The tailored performance matrix motivates professionals to give their best, although the supervisory control is kept to a minimum. People become individually
30 accountable for their contribution to “collective” success. That is the direct antithesis to a company’s arrangement in communism when the collective success was the key issue based on nobody’s accountability.
The shift from industrial age to knowledge society also requires a new approach to a company’s performance measures. Since the talent – not capital – is nowadays a company’s scarcest resource, measures of wealth call for a focus adjustment: looking primarily at returns on people not on capital. This principle better shows the utilization of scarce intangibles. The return on employee and number of employees could also be substituted by the number of brands, for instance. However, the people formula has a number of advantages. It is easier to get and people (talent) serve as a generator of the other intangibles. It should be kept in mind that the possession of a unique talent and its retention can create a “natural monopoly” which is almost impossible for the competitors to copy.
3.4.2. AAA model
Over the McKinsey´s and other consultants´ attempts to create an organizational design reflecting the challenges of 21st century, the previous structures were not totally forgotten.
Pankaj Ghemawat from the Harvard Business School developed them further and published in March 2007 his study called Managing Differences: “The Central Challenge of Global Strategy”. This working paper is concerned with the issue of gradual business internationalization and brings a handy solution of how to recognize suitable corporate design. It gives a framework which helps managers match a particular business strategy with a proper organizational structure.
31 The new framework is called AAA model21. The three A´s stand for the three different types of strategy.
Adaptation – seeks to boost revenues and market share by maximizing a firm’s local relevance. Companies set up businesses in foreign countries in order to catch up with domestic producers. These units carry out all steps in the supply chain. It is mostly used as a first phase of internalization.
Aggregation – leads to a partially standardized product and to a creation of regional or global platforms in order to achieve economies of scale.
Arbitrage – tries to find the advantage in global scale. The objective is to exploit the differences between regional markets. That represents the most advance way of organization within the process of globalization. It is typical that the supply chain is dispersed into different locations worldwide (a call centre in India, manufacture in Taiwan, distribution and sales in Western Europe). The arbitrage can work for instance in Europe as well, e.g. a call centre in the Czech Republic, production in Romania and serving the German market.
According to management priorities, the strategy is related to a particular form of organizational structure. The adaptation leads to a country-centered organization whereas aggregation is associated with global business units, product divisions, etc. A vertical or functional arrangement is the best suitable for a company focusing on arbitrage.
21 Ghemawat, Pankaj. Managing differences: The Central Challenge of Global Strategy.Harvard Business Review, 2007
32 Exhibit 8: The AAA Strategy's impact on Organizational Strucutre
Strategy Organizational
Structure
ADAPTATION → Country-centered
AGGREGATION
→
Cross-border grouping (global business units, product division, global accounts, regional structure)
ARBITRAGE → Vertical/functional
Source: Ghemawat, Pankaj. Managing differences: The Central Challenge of Global Strategy.Harvard Business Review, 2007
To do all three A´s of the triangle is not that easy. There are many differences and tensions among them and companies should accentuate those A(s) which are in accordance with their priorities.
IBM is, according to Mr. Ghemawat´s study, one of the few which has gone the way through the whole AAA triangle. It started going international by setting up “mini-IBMs” in foreign countries and by means of local adaptation they gained trust in local markets. Later on they leveraged some functions on regional or even global level to achieve efficiency, economies of scale and thus the competitive advantage. More recently, IBM attempted to exploit cross border variety by arbitrage. The usage of wage differentials in China by means of a significant increase in the number of employees can be a good example of an arbitrage.
However, most companies inhere in one, maximally two, As to be effective in their activities.
For example the worldwide well-known company Procter and Gamble started with the strategy of adaptation and ended up with aggregation up to regional level. The reason for skipping the phase of arbitrage is obvious. It would not be worth in cosmetics, for instance, to transport goods from China to serve the European market.
33 The AAA Triangle should work as a strategy map for managers helping them to find the best organizational structure which is likely to bring the most leverage for their companies. The model’s fundamentals are based on particular expense items from the income statement and their relevance and thus importance for a company. The axis of triangle measure advertising, research & development and labor expenses in relation to overall sales (calculated as a percentage of sales). The relation between the height of costs and organizational approach is shown in the exhibit below:
Exhibit 9: AAA Model
Source: Ghemawat, Pankaj. Managing differences: The Central Challenge of Global Strategy. Harvard Business Review, 2007
As the diagram demonstrates the more a company spends on advertising the higher is its need for adaptation to local market. Those firms that do a lot of R&D may want to aggregate in order to achieve the economies of scale since the results can be easily spread across borders.
Additionally, it is not necessary to operate an expensive R&D lab in every country where they are present. The arbitrage will be a particular concern for companies whose operations are labour intensive because the costs of labour vary significantly from country to country, around the world and when the character of the final product the arbitrages enables.
ADAPTATION Advertising-to-sales
AGGREGATION R&D-to-sales 10%
8%
6%
4%
2%
10%
8%
6%
4%
2%
100
% 80%
60%
40%
0 20%
ARBITRAGE Labour-to-sales ADAPTATION
Advertising-to-sales
AGGREGATION R&D-to-sales 10%
8%
6%
4%
2%
10%
8%
6%
4%
2%
100
% 80%
60%
40%
0 20%
ARBITRAGE Labo -to-sales
34 Mr.Ghemawat verifies his theory on two companies already mentioned – IBM and Procter and Gamble. Two different companies were randomly chosen to check the general relevance of the theory – Carlsberg, the Danish brewery group and Pfizer, an American pharmaceutical company. The particular expenditures in 2006 were calculated and mapped on the AAA Triangle. For the result see the diagrams below:
Exhibit 10: AAA Model - Pfizer
Source: Pfizer Annual Report 2006, www.pfizer.com ADAPTATION
Advertising-to-sales
AGGREGATION
R&D-to-sales 10%
8%
6%
4%
2%
10%
8%
6%
4%
2%
100%
80%
60%
40%
0 20%
ARBITRAGE
Labor-to-sales
35 Exhibit 11: AAA Model - Carlsberg
Source: Carlsberg Annual Report 2006, www.carlsberg.com
Looking at the Carlsberg’s and Pfizer’s organizational structure it seems that it perfectly corresponds with the outcome of the AAA Triangle.
Carlsberg - as a beer producer - has to pay great attention to tastes and preferences of local consumers and therefore the adaptation is vital. Its organizational structure, as of 2004, was divided geographically – into zones of Western Europe, Eastern Europe and Asia. Each zone was further broken up into finer sub-units with substantial autonomy. The international growth is realized by acquisitions of local breweries.
Pfizer – a one of the biggest and most influential pharmaceutical group in the world- has to focus mainly on R&D to remain a step ahead of its competitors. The logistics, finance, production and other functions can be then aggregated on the regional level since the local preferences in this industry are not as variable as they are in beer. Pfizer operates under a matrix structure having five product divisions geographically split into 4 areas – USA,
ADAPTATION
Advertising-to-sales
ARBITRAGE
Labor-to-sales
AGGREGATION
R&D-to-sales
10%
8%
6%
4%
2%
10%
8%
6%
4%
2%
100%
80%
60%
40%
20%
0
36 Europe/Canada, Japan/Asia and Latin America. There is only sales and partially marketing kept on the country level.
To sum it up, today’s MNC operates in very complex business world where competition is fierce and knowledge is the company’s most scarce resource. Knowledge along with brands and networks serves as the main value creator. Efficiency, as a matter of fact, retains its importance mainly in the field of production. Mr. Ghemawat formed a framework helping to recognize which organizational design fits best in a particular company and leads it to maximal efficiency.
37
4. Central and Eastern Europe: Principal changes on the economic map of Europe
A very specific economic environment and business conditions emerged from the break down of communist regime and from the disintegration of the socialistic block in the countries of Central and Eastern Europe (CEE) in early 1990´s.
For the purpose of this study, CEE has been defined as Belarus, Bosnia and Monte Negro, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Poland, Slovakia, Slovenia, Romania, Russia, Serbia and Ukraine. This grouping is based on the general perception of western investors.
This region comprises more than 300 million people in an area of 6 square miles, which is 1.8 times that of the EU 15. With the average annual growth of 5.5%, the region represents a very attractive opportunity for multinationals. (On Exhibit 12 we can compare the average growth rates of CEE and EU 15)
Exhibit 12: GDP Growth Rates in CEE and EU 15
Source: Economic Intelligence Unit data
http://secure.alacra.com/cgiin/alacraswitchISAPI.dll?app=eiusite&msg=ExecContent&topic=GetSearchOptions
&datasource=countrydata&sk=guest17
(1): Selected countries only (2): CAGR 2001 - 2006 Source: EUI
5,1 4,4 3,5 3,8 3,4
0,6 0,8 1,2 1,6 1,7 2,0 2,2
3,2 2,7 2,2
PT IT DE FR NL BE DK AT UK SE ES FI LU GR IE Country 5,4 5,4
5,9 4,7 5,0
4,0 4,3 3,6 3,9
2,6
6,4 6,4 7,8
8,7 8,9
M K PL SI CZ HU HR BA BU SK RO RU UA LT LV EE
CEE(1) EU-15(1)
Annual GDP growth (CAGR)(2)
Annual GDP growth (CAGR)(2)
Average: 5,5
Average: 2,17
(1): Selected countries only (2): CAGR 2001 - 2006 Source: EUI
5,1 4,4 3,5 3,8 3,4
0,6 0,8 1,2 1,6 1,7 2,0 2,2
3,2 2,7 2,2
PT IT DE FR NL BE DK AT UK SE ES FI LU GR IE Country 5,4 5,4
5,9 4,7 5,0
4,0 4,3 3,6 3,9
2,6
6,4 6,4 7,8
8,7 8,9
M K PL SI CZ HU HR BA BU SK RO RU UA LT LV EE
CEE(1) EU-15(1)
Annual GDP growth (CAGR)(2)
Annual GDP growth (CAGR)(2)
Average: 5,5
Average: 2,17
38 In early 1990’s, this so far untouched area without any marks of trade competition meant a great challenge and opportunity for western corporations. The empty market and eager demand for western products seemed to be an easy catch. However, this shining gloss was equally balanced by rising problems. Many obstacles for setting up new business in this area emerged instantly. The economic transformation from the central planned to free market economy brought about specific features which required a significant adjustment in corporations’ approach to a new market. This period was even more difficult for the incoming companies due to the uniqueness of the situation since there was no model in the entire world history to follow. The changes were economical, institutional, structural and systematic. The economic transformation was mostly forerun by political transformation and followed by prices and international relations liberalization along with privatization and monetary and inflation stabilization.
In the enthusiasm of the new political and economic leaders, many crucial mistakes have been made in the process of transformation. The economy was opened too quickly without sufficient legal background and protection. As a result the western corporations attacked the CEE with not many large local businesses surviving.
4.1. CEE: A Promising Region for Corporate Investments
The economic literature talks about many motivators for MNCs to come into this region. John Dunning (1993) and Jack Behrman (1984) describe in their analysis three main types of primary motivation for MNC expansion into CEE22:
Market seeking - potential of the market is the key reason for entering a CEE country.
The investment is made in order to build and strengthen the position in the region. A
22 Transnational Corporations Vol. 13, N.2. UNCTAD. United Nations, 2004. p. 10-11
